Tax Season Ends and Tax Planning Begins



By:  Ben Dorsey | CPA , CFP®, MST – Director of Tax Services

Most tax professionals breathe a sigh of relief after tax returns are filed  and tax season ends. Many seasoned tax professionals see April 16 as an opportunity to take an industry-sanctioned holiday and recharge their batteries at the tropical venue of their choice. However, for BWFA tax professionals, the end of one tax season marks the beginning of planning for the next. Now is the time we can work with clients to assess ways to maximize  contributions  to  tax-advantaged accounts. Alternatively, we can evaluate if it is appropriate to accelerate future income into the current period to take advantage  of  unusual  circumstances.

Every year brings new changes and new challenges as well as new planning opportunities. Legislative changes enacted in January 2013 created a system that has impacted taxpayers in the highest brackets and also created a means of imposing additional taxes on investment income. At the same time, certain deductions may be limited. While the results may be subtle, the potential still exists to take advantage of untapped planning strategies.

Potential opportunities exist in tax- deferred investment vehicles, but where will the money come from? we preach the old adage of  “pay yourself first,” often best achieved by implementing a savings plan with automatic and ongoing contributions.”

Alternatively, you may find yourself relieved of a large financial burden as you approach retirement; e.g., paying off the mortgage or watching the last child graduate from college. The savings can be used to accumulate wealth in a tax-deferred investment vehicle, allowing you to reduce your current income-tax bill by your respective tax rate.

The potential to save taxes, limit taxes imposed on investment income, and avoid the phase-out of itemized deductions leads to the “perfect storm” of tax planning. Directing once-spoken-for dollars toward maximizing retirement plan contributions is one of the best chances clients have to accumulate additional wealth. This can help ensure they face a long and prosperous retirement. It can also defer payment of the related tax bill until age 70½ or later.

While it is a good rule of thumb to save taxes today, there are times it may be beneficial to accelerate income recognition and the related taxes. As the country continues to recover from the “Great  Recession,” many  taxpayers  find themselves working in a reduced role. The potential exists to capitalize on the short- term lower tax brackets that accompany the reduced income. If you were fortunate enough to have built a comfortable nest egg of tax-deferred retirement dollars, this might be the time to convert some of these funds into Roth accounts.

From a tax perspective, Roth IRAs serve the opposite purpose of traditional IRAs and 401(k)s. While traditional 401(k)s and IRAs allow you to delay the tax related to contributions made to such plans, Roth IRAs provide no immediate tax benefit. However, they do allow tax-free growth during your lifetime. In addition, distributions after 59½ are also free from tax. Roth accounts are generally funded with annual contributions in the same manner as traditional retirement plan accounts. The IRS will also allow taxpayers to convert traditional retirement funds to a Roth account if the taxpayer includes the converted amount in gross income in the year of conversion.

The proper financial plan might shed light on the fact that your projected tax brackets in retirement may, in fact, be higher than your pre-retirement tax brackets. This is more likely if a reduction to part-time employment is expected.  While clients do not typically enjoy writing checks to the IRS, the short-term pain from doing so can greatly impact the net after-tax dollars received from traditional retirement funds. In the past, some taxpayers who were willing to pay taxes resulting from a conversion were ineligible to do so, as Roth conversions were only available to individuals with adjusted gross incomes (AGI) less than $100,000. This rule was abolished in 2010. The current tax law allows all taxpayers to take advantage of the conversion option without AGI limitation.

Regardless of the tax-planning strategy, the identification and communication  of the opportunities and subsequent execution will ultimately impact the dollars that make it into the bank.  At the end of the day, it is not what you make, but what you bring home that matters.